Inflation will not normalize soon so seek stocks with ‘pricing

Although it will come down from imminent peaks, inflation is unlikely to normalize in the near future, according to Francesco Curto, head of research at asset management firm DWS, as he advised investors to look for companies with strong pricing power.

U.S. inflation came in at 7% in December on an annual basis, according to new figures published on Wednesday, its highest print since 1982. Meanwhile, consumer price rises in the U.K., Europe and elsewhere also hit multi-decade highs in recent months, prompting most central banks to begin guiding the market towards a tightening of monetary policy, with the exception of the European Central Bank.

U.S. Federal Reserve Chairman Jerome Powell told a Congressional hearing on Tuesday that interest rate hikes and a smaller balance sheet, what he described as a “normalizing” of policy, would be necessary to rein in inflation.

However, Curto told CNBC on Wednesday that the higher carbon and energy prices required to achieve governments’ emission reduction aims would prevent the kind of “normalization” that would pull inflation back down towards central bank targets.

Lower prices, he argued, would be essential to getting consumers back to spending in light of the pandemic even as a lifting of Covid-era restrictions frees up more supply.

“People are going to be very upset if all of a sudden after the pandemic, they’re starting to see higher inflation eating into their spending power. That is a clear risk from a sustainability perspective,” he said.

Much of the investment narrative over the past year has centered around a rotation from highly valued growth stocks, such as “Big Tech” (referring to companies such as Apple and Alphabet), towards value stocks. The latter refers to companies trading at a discount relative to their financial fundamentals, such as banks and energy, both of which performed well in 2021 on expectations of higher interest rates.

However, the various Big Tech sell-offs have been short-lived, including that seen last week, calling into question the expected inverse relationship between value and growth. Curto echoed other commentators in noting a divergence between speculative tech stocks and those with proven pricing power.

“We have seen over the last 12 months now a significant negative price adjustment on some of the speculative assets that were just driven by fast money, by quantitative easing, and there were questions about where this business is ultimately going to deliver some real level of profitability,” he said, adding that investors were right to be cautious about this segment of the market.

‘More nuanced approach’ in 2022

The tech-heavy Nasdaq 100 suffered a steep sell-off in the first week of the new trading year, but has since rebounded as the growth-to-value shift seemed to fade in recent sessions.

“I think that the way to navigate an…